Commercial due diligence requirements for digital business models

Digi­ta­liza­tion has not only funda­men­tally chan­ged the busi­ness models of compa­nies, but has also had an incre­asing impact on due dili­gence reviews in the context of corpo­rate tran­sac­tions — espe­ci­ally in a commer­cial context. On the one hand, the propor­tion of pure digi­tal compa­nies in the port­fo­lios of private equity compa­nies has risen shar­ply in recent years; on the other hand, tradi­tio­nal compa­nies are incre­asingly expo­sed to digi­tal chan­ges and more intense digi­tal compe­ti­tion. It is appa­rent that digi­tal compon­ents are not suffi­ci­ently appre­cia­ted, espe­ci­ally in compa­nies with a clas­sic non-digi­tal busi­ness model.

Digi­tal commer­cial due dili­gence conse­quently evalua­tes these topics and focu­ses both on the evalua­tion of digi­tal compa­nies or busi­ness models and on the assess­ment of the “digi­tal readi­ness” of tradi­tio­nal compa­nies. Espe­ci­ally when audi­ting pure online play­ers, it is no longer suffi­ci­ent to follow the clas­sic commer­cial due dili­gence approach, as the diffe­ren­ces between the value crea­tion models are too high. Digi­tal enter­pri­ses are “asset-light,” highly scalable, and gene­rally more inter­na­tio­nal in scope. The sales engine, culture and team also differ signi­fi­cantly, to name just a few examp­les. This requi­res the targe­ted use of digi­tal tools and methods and a sound under­stan­ding of digi­tal busi­ness models (e‑commerce, market­place, network, etc.) in commer­cial audi­ting. For exam­ple, addi­tio­nal digi­tal modu­les such as online perfor­mance and sales engine analy­sis (inclu­ding cohort analy­sis, conver­sion rates, KPIs on CAC, CPC, SEO, SEA), user expe­ri­ence and usabi­lity, or the tech stack and IT infrastructure/technologies must be added to ensure a fully compre­hen­sive and adequate audit.

For reasons just mentio­ned, we are seeing increased demand for performing Digi­tal Commer­cial Due Diligences.

To begin with, digi­tal issues are beco­ming incre­asingly important for finan­cial inves­tors as well. Essen­ti­ally, the ques­tion to be answe­red is how stron­gly one is expo­sed to digi­tal change, how well the company is prepared for it, and what risks and oppor­tu­ni­ties arise for the company as a result.

In parti­cu­lar, the degree of digi­tiza­tion and the target’s online presence play a decisive role here. This must be compared with the market and compe­ti­tion. Here we look in parti­cu­lar at the future market deve­lo­p­ment in the online segment or the posi­tio­ning of the target compared to the compe­ti­tion (e.g. online compe­ten­cies vs. core compe­ti­tion). In addi­tion, we analyze digi­tal issues along the entire custo­mer jour­ney. The possi­ble influence of new play­ers or estab­lished online play­ers, such as the Amazon, is analy­zed and evalua­ted. For exam­ple Amazon in the consu­mer goods envi­ron­ment is incre­asingly purcha­sing cate­go­ries with private label products, which in some cases repres­ents a considera­ble risk for estab­lished play­ers and thus has “game-chan­ging” poten­tial. Accor­din­gly, the share of sales gene­ra­ted online today and in the future plays a decisive role, as this compo­nent also flows into the busi­ness plan­ning of a target company.

As part of our Digi­tal Commer­cial Due Dili­gence, we ther­e­fore conduct a Digi­tal Readi­ness & Oppor­tu­nity Assess­ment for compa­nies with busi­ness models that are not purely digi­tal in order to examine the above-mentio­ned topics. Key invest­ment crite­ria are high­ligh­ted that would not have been addres­sed and exami­ned in this form in a conven­tio­nal commer­cial due diligence.

In tran­sac­tion proces­ses, an entre­pre­neur should prepare for these issues in advance of a sale. Basi­cally, a Digi­tal Readi­ness & Oppor­tu­nity Assess­ment exami­nes the degree of digi­tiza­tion of a company, i.e., how digi­tally is the company and in parti­cu­lar the busi­ness model posi­tio­ned and are there suffi­ci­ent digi­tal compe­ten­cies within the orga­niza­tion. Essen­ti­ally, the task is to evaluate the extent to which the value chain is suffi­ci­ently digi­ti­zed, start­ing with rese­arch & deve­lo­p­ment and agile deve­lo­p­ment methods and ending with the digi­tal matu­rity of the supply chain. The decisive factor is which online sales chan­nels are used and how sales are aligned with digi­tal requi­re­ments throug­hout the entire custo­mer jour­ney and user experience.

Here, the exis­ting proces­ses, IT land­scape and road­map of a company are conside­red. The respon­si­ble person­nel or in-house IT compe­ten­cies also play an important role in asses­sing the extent to which rele­vant IT know-how is available in the orga­niza­tion. — Coupled with analy­ses of the market and compe­ti­tion, it evalua­tes how fit a company is for the future in terms of digi­tiza­tion and auto­ma­tion. For compa­nies that are highly expo­sed to digi­tal trans­for­ma­tion, it is advi­sa­ble to conduct a Digi­tal Readi­ness & Oppor­tu­nity Assess­ment in advance of a contem­pla­ted tran­sac­tion and initiate neces­sary trans­for­ma­tion initia­ti­ves. This leads to a signi­fi­cant impro­ve­ment in the invest­ment rationale.

Markus Frän­kel

Markus is mana­ging part­ner of Blue­mont Consul­ting. He has more than 25 years of expe­ri­ence in manage­ment consul­ting and indus­try. He has worked for renow­ned manage­ment consul­tancies, such as 12 years at A.T. Kear­ney as Head of Marke­ting & Commu­ni­ca­tion for Central Europe. He laid the foun­da­tion of his profound expe­ri­ence in the consu­mer goods indus­try and trade as Head of Key Account Manage­ment at Choko­la­de­fa­bri­ken Lindt & Sprüngli and as a consul­tant at MC Marke­ting Corpo­ra­tion. One of the main areas of consul­ting is Tran­sac­tion Services. Here, Markus has been invol­ved in more than 100 due dili­gen­ces and around 200 consul­ting projects in various indus­tries and in the digi­tal envi­ron­ment. Markus studied busi­ness admi­nis­tra­tion at the Univer­sity of Mannheim.